House Votes To Restrict Wall Street Pay

[Marin]

Now watch the Pay Czar in action.

 

[garyd]

Excellent work Illusion. Everything about this mess has to do with government intervention into the market at almost every level of government.

 

[Toro]

I disagree with limiting pay.

However, egregious pay packets are one of the reasons why this crisis happened since traders and executives maximized their pay by piling on more and more leverage into the system. But we shouldn't be restricting pay.

Instead, we should be

1. Reforming corporate governance laws to make it easier to hire and fire directors, make the compensation committee completely independent, separate the Chairman from the CEO, and various other reforms in corporate governance. America lags considerably behind many other countries in terms of corporate governance as corporate insiders have paid off Washington to perpetuate their own existence at the expense of shareholders.

2. Limit leverage on any large financial company, full-stop. Congress can pass as many laws as it wants on this one.

3. Increase transparency so shareholders have a greater idea what the banks' exposures are. One of the (many) reasons why we taxpayers had to bail out Wall Street was because nobody had any idea what the exposures were. Wall Street opposes this bitterly.

4. Move most derivative trading onto exchanges.

5. All credit default swaps must be capitalized significantly.

I don't like the idea of capping pay but it is not surprising. Goldman Sachs might not exist today had it not been bailed out by the government. There is something enormously untoward about a bank taking more bailout money and guarantees than its entire equity capital base, then paying out its biggest compensation packages ever a mere six months later.

The financial system is completely fucked, and if we don't reform how we operate, we are going to go through this all again.

 

[garyd]

We almost certainly will because we aren't moving (and I don't know that we can) to redress the balance between wages and housing prices.

 

[Toro]

How and why did bonuses become part of the compensation package for higher executive officers?

Well it's all about unintended consequence of government regulation. Prior to 1993 officers pay in publicly traded corporations were tax deductible by the corporation as a cost of doing business. The Revenue Reconciliation Act of 1993 and IRS codifying rule 162(m) changed the amount deductible. The Act and Rule influences compensation by limiting the deductibility of salary expense to $1 million for each of these executives. Deductibility above that ceiling was permissible as long as the excess came in the form of performance-based compensation, whether cash bonuses or equity-based compensation like options.

So government regulation created the environment and need for bonuses.

Further another rule, double taxation of dividend, created non dividend stock which flushed the board room with excess money. If a company decides to pay out dividends, the earnings are taxed twice by the government because of the transfer of the money from the company to the shareholders. The first taxation occurs at the company's year-end when it must pay taxes on its earnings. The second taxation occurs when the shareholders receive the dividends, which come from the company's after-tax earnings. The shareholders pay taxes first as owners of a company that brings in earnings and then again as individuals, who must pay income taxes on their own personal dividend earnings.

So, stock holders not wanting to be taxed twice said "We'll forgo dividend, just reinvest the money, grow the company and we'll take the reward in higher stock value." This of course left all of the earnings or profit in the company board room, available for... ... wait for it...... higher bonuses.

Government regulation caused the bonus issue, only by leaving well enough alone will the problem be corrected. But, alas that won't happen, they (the gov.) will meddle more and create another larger problem.

Jamie

Jamie

I think there is truth in this but there is more to it.

Bonuses have always been a part of Wall Street culture. Compensation on Wall Street is paid relative to revenues. When revenues go higher, so does compensation.

Wall Street figured out how to lever up its balance sheet through either off balance sheet transactions or convincing the regulators they were smart and they could handle more and more leverage.

Revenues went up with leverage because as the traders could borrow more, they could buy more assets and take the spread between the assets and the borrow. More leverage, more revenues, more bonuses.

Another aspect was Wall Street moving from partnerships to private corporations. In limited partnerships, the partners bare all the risk. In a public stock corporation, shareholders take the risks. If the insiders hold little stock, they can take assymetrical risk such that if they make a great trade, they accrue much of the winnings whereas if the trade lost, it came out of the shareholders pocket.

 

[Old Rocks]

Wasn't this part of what the Enron insiders were doing?

 

[The Illusion]

Wasn't this part of what the Enron insiders were doing?

Im not quite sure.

Jamie

 

[ba1614]

LOL. We, the taxpayer bailed the parasites out, we can damned well determine their paycheck. It was not the man on the factory floor that created this debacle, it was these worthless parasites. Time for them to learn what the results of failure are.

You stupid Rushpublicans on this board would reward failure to anybody that was already rich, and punish those that are middle class for success. You, and your minions, are what has put this nation in the present condition it is in. When your incompetant was given the White House by the Supreme Court, this nation was in excellant shape. Ol' a'W'ol ignored the warnings concerning terrorism, and lowered taxes at the same time as he lied us into an unneccassary war. Now we are reaping the rewards of the idiocy that you cheered on, and trying to ameliorate the damage, and you are trying to inflict even more damage on this nation. Real patriots, you fellow.

I could live with it if it was limited to those that received bailout money, but how are successful companies that require no government funds considered "failures"? The government should stay out of their affairs or they sure as fuck will fail before long with their meddling.

 

[chanel]

I agree. But it just seems to me that the rules changed AFTER they took the bailout money. Perhaps their decisions would have been different if they had been made aware of the strings. I'm no economist, but this just smells bad to me. If they pay back the TARP, will the strings be cut?

 

[The Illusion]

I agree. But it just seems to me that the rules changed AFTER they took the bailout money. Perhaps their decisions would have been different if they had been made aware of the strings. I'm no economist, but this just smells bad to me. If they pay back the TARP, will the strings be cut?

Im not quite sure if their decisions would have been different before they took the bailout money. Things have been haywire on wallstreet lately...

Jamie